The Global Corner: Global Value Chain – What is it?

June 19, 2013

First there was the Global Economy. Now a new term has entered thelexicon of international trade, Global Value Chain. Based on anarticle from the WSJ, exports depend more than ever on imports. Whatdoes this mean? It simply means most manufacturing depends on imports to complete a finished product and according to the article import content has reached 40% of value-added to whatever is manufactured.

So what? one might ask. If fully explored, the results can add to apyramid of costs to the consumer. Suppose country A ships goods tocountry B that adds value and then ships to country C (one can addto this growing alphabet dependent upon how much value is added byimporting/exporting manufacturers as it moves through the supplychain).  Each shipment that is imported incurs not only tariffs by thehost country, but potential regulatory costs that can be onerous. Forexample, it is estimated that various regulatory and documentation costs for imports adds 10% to the costs of imported products. And, when youadd the host countries tariffs (pick a number), you can see theescalated costs of the Global Value Chain.

Proponents of free/fair trade understand the impact of regulations andtariffs that are protective in nature. Those in this camp are supporting any trade agreement between nations that will reduce these costs. TheGlobal Value Chain is predictably confusing in light of local contentlaws required to be eligible for free-trade agreements.

Currently, there are two significant trade negotiations underway by the U.S. One is the Trans-Pacific Partnership (TPP) and the other is EU-USmega-regional agreements. These type negotiations are typically drawnout, but when special interests are side-lined, some good results canunfold to the benefit of the end-user or consumer.  

Real life experiences include the findings at a recent trade showfeaturing a South Carolina manufactured product that is the marketleader in its category in the U.S. Even though the S.C. product was farsuperior to any competitor’s product in the host country, South Africa,there is an import tariff of 20% on the U.S. product, plus somedocumentation hurdles, both items clearly impeding entry into the localmarket.

Like many political issues (and this is one), awareness is the firstadvance toward action. All consumers should add free tradeconsiderations for whom to elect for the highest offices. The GlobalValue Chain will only grow as interdependency expands between nations.Those government leaders that do not advocate for free trade agreementsand fewer non-tariff trade barriers will only cause higher prices at the cashier’s counter as products move through the Global Value Chain.

Jerry Smith is CEO of Riverstar International LLC and USA eShopLLC, both companies specializing in exporting. A regular contributor toMidlandsBiz, he can be contacted at [email protected]